ROB:    This is Rob Hassett for btobmagazine.com.  I'm going to be interviewing today Penny Prime who is the director of the China Center in Atlanta and teaches in the MBA program at Mercer University.  Penny, it's a pleasure having you on today.

PENNY:    Thanks, Rob.

ROB:    Penny, I understand that you have a Ph.D. in economics from Michigan, and economics is basically your field, right?

PENNY:    Yes, that's correct.

ROB:        And you also learned Mandarin.  Now how did you learn Mandarin?

PENNY:    My major in undergraduate school was Chinese studies and Mandarin was part of that major, so it was my language in college.

ROB:    And you had mentioned to me that it wasn't so terribly hard to learn to speak it, but that the hardest part was learning to read it.

PENNY:    That's correct.  You have to have a good memory, I think.  Memorize each character in terms of its meaning, its sound, and how to actually write it.

ROB:    Penny, when we're talking about China, China has become a major trading partner with the U.S. and there's a lot of controversy about the balance of payments issue with China, and that we spend a lot more for their goods and services than they do for ours.  As an
economist and a person knowledgeable about China, do you consider the balance of payments to be an important issue for the US?

PENNY:    Well, the balance of payments is always important if it gets too out of balance which, I think for the U.S., is definitely the case in the 2000s.  In general, I don't think it's an issue.  The problem with China and the U.S. is that they are such big major trading partners and China has a large trade surplus of which the U.S. is a major part, and we have a very large trade deficit of which China is a major part.   Of course, it creates a lot of attention and controversy.  One of the focus points is always the currency.  The accusation is that China has an undervalued currency, maybe as high as 40% some people say.  If that changed, the balance of payments would change.  And China has appreciated its currency about 20-25% since 2005.  That actually hasn't made much difference yet.  But they still need to appreciate it more to achieve the goals they want as well, and they will, but I think what will affect our balance for us will be behavior at home, such as saving and less consumption.

ROB:    Approximately what do you think the Chinese currency would have to be upwardly valued in order to reach its true value?

PENNY:    I would guess somewhere around 20%, but I'm just guessing.  They have a very large trade surplus, and for them, just changing the currency won't be enough either.  There are structural problems.  Maybe 20% is too high.  They still need to do other kinds of reforms domestically in order to rebalance their external and internal resources as well.

ROB:        What are the structural problems?

PENNY:    Well, in China they consume too little and save too much, and we just do the reverse here.  And it has to do with the way incentives are set up in each place.  China needs to create more of a competitive domestic market and allow more entrepreneurship and payments.  For example, if you invest in the stock market in China, you don't get paid dividends.  You only trade on price differentials.  And one of the things in the U.S. is, if we invest, it's often an income stream for us.  Those kinds of reforms are on the table in China, but just haven't happened yet.

ROB:    In the U.S. we also get an interest tax deduction for buying homes and that increases home ownership and a lot of spending on that.

PENNY:    Right, exactly.

ROB:        So there's a lot of that sort of thing I guess.

PENNY:    Yeah, and that's not the case in China.

ROB:        What is the China Center?

PENNY:    The China Research Center is a group of people who follow the developments in China closely.  Most of us do research on China, most of us are academics, but not all.  And the goal is to share our research results with a wide audience.  We do an online journal and lots of public speaking and custom programs for companies and for universities.

ROB:    And the China Center has a lot of Atlanta schools, including Mercer, that are part of it or involved in it, right?

PENNY:    Right.  They are China scholars in the area who are interested in working with our mission.

ROB:    Other than the savings rate, are there any other advantages China has that make a huge difference in the trade balance?

PENNY:    Well, China's advantage has been really, I would say, opening to globalization and doing their reform at a time when globalization really took off.  After the fall of the wall in Berlin in 1989, China was poised having had a few years of reform already, to join that, and it became a place where foreign investments could build manufacturing facilities.  And, of course, it was very close to Hong Kong, so the companies could also utilize the financial and logistic strength of Hong Kong, but then use the relatively inexpensive labor and land costs in China.  And lots of manufacturing globally has clustered and conglomerated in southern China, which then led to economies of scale and other benefits.  China has become kind of a center for manufacturing, partly by timing.  Some of it was good policy, obviously, and they built and structured the service those businesses needs.  That's a main advantage.  And the second main advantage is their domestic market which attracts companies, and that's the piece that needs to be developed further.

ROB:        What is the population of China now approximately?

PENNY:    About 1.3 billion.

ROB:        And the U.S. is about what, 300 million?

PENNY:    Right.

ROB:    Are there any competitors for China in the foreseeable future, any countries that could displace China in part as a source of cheap manufacturing?

PENNY:    Well certainly at the low end in terms of low tech, Vietnam is one popular place where some manufacturing is moving.  Also Bangladesh and to some extent India.  And in other places, even the Philippines, other places around Asia.  At the higher end, the main competitor of China is really Mexico, and they tend to produce very similar kinds of products at similar technology levels.  And, of course, both want to compete in the U.S. market in particular.

ROB:    And Mexico has the advantage of proximity, and I would imagine the increasing fuel cost is an advantage for Mexico.

PENNY:    Right, it could be.  But Mexico has to overcome the fact that China has this really geographical concentration of manufacturing and services, that makes it very convenient for companies to manufacture and export from southern China.  And Mexico hasn't built that sufficiently, but it has these other advantages as you mentioned.

ROB:        And right now, China is way ahead of Mexico in the heavy goods?

PENNY:    Yes, it is.  Yes.

ROB:    Now in China, does China have an advantage in having an autocratic government?  I mean I know it can be a disadvantage, but economically, does it give it an advantage over democracies?

PENNY:    Well, I would argue it doesn't, but there are people who find that convenient.  But it does create lots of other problems in terms of transparency and what can and can't happen in terms of decisions.  I think it makes the long term more problematic than a democracy.

ROB:    Just in the sense that in the long term there may be more disagreements with the government that don't come to light?

PENNY:    Well, yes.  And there are very few avenues for expressing differences of opinions and dissent, and those kinds of things actually lead to progress in many cases.

ROB:    You had mentioned to me that we think about all the scientists that come from out of China that are in China and engineers, and we get the feeling here that there are just millions of graduates of engineering and science schools in China, but you had mentioned to me that actually a small percentage of the Chinese students go on to college.

PENNY:    Well, now that's true.  At least the census, China's census in 2000, put the number at 3.5% of college age people go to college.  Now it's a little bit higher than that now because the central government has really made an effort to expand the number of seats in the main universities and also allowed private universities to start to develop, but I think it's still perhaps 6-7%.  On the other hand, 6-7% of 1.3 billion, whatever the right demographics, is still a lot of people.  In absolute numbers, it's still a lot, and many of them do choose science, but certainly not all of them.

ROB:        And they have a very, very competitive system for advancing in school to college?

PENNY:    Right.  That's right.  Because there aren't many seats at the top.

ROB:    I don't know if you would know this, but do you know whether it's as competitive as getting into the Indian Institute of Technology?

PENNY:    I don't know.  I would guess it's somewhat similar but I don't know.  I don't have a gauge for that.

ROB:    Sure.  Also in China, because of what I understand was a tendency to favor baby boys over baby girls, and an incentive to have only one child per family, there are a lot more men in China.

PENNY:    Yes.  A one-child policy has definitely exacerbated that preference largely, especially in rural areas, because if you can only have one child and you don't have a male child, then your one daughter will marry into another village in another family and you won't have someone to help with the farming and to take care of the parents when they're older.  Certainly rural families want to have at least one son.  But there seems to be a general preference to have at least one son for many families, so there is that bias.

ROB:    But it's lessening somewhat now.  The government's become less strict about the one child per family rule, right?

PENNY:    Somewhat less strict, and families can pay a fee to have more than one child in many cases, but the imbalance is quite serious.  I mean by now, because of a number of decades of one child per family policy, the national average is 119 males to 100 females.  And the UN's maximum recommendation is 107 males to females.  They are way beyond that, and in certain areas it's much higher than that.  Just relaxing the rules a little bit isn't going to change this anytime soon.

ROB:        Do you know what the ratio is in any other countries?

PENNY:    Well it always tends to be a few more males than females -- it's like a 105 or 103, something like that, per hundred, would be more of the norm.

ROB:    One thing that was interesting is you had mentioned to me that as far as personal corruption there, where people take bribes and that sort of thing for personal reason, there's not much of that in China.

PENNY:    Well, in terms of day-to-day activities there's not much.  But the reform process where China slowly introduced the market into the planning system, actually created a lot of opportunities for corruption, where you had two prices for the same good in many cases, and you can see right away what problems that would cause, and access to resources.  And one of the big ones now is how land gets distributed.  And there's certainly lots of corruption attached to all of those kinds of activities.  But I think in general people sense that corruption's gotten worse with reform, even though there's more market activity which would tend to bring corruption down.  It's more than before, but perhaps reached some kind of peak and may improve from here.

ROB:        But it's less in the way of personal bribes than a lot of other countries, as I understand.

PENNY:    Well I think in terms of just day-to-day and getting things done, you don't necessarily have to bribe people, which is nice.

ROB:    Right.  And which is common that you do have to bribe people in a lot of areas of the world, I understand a lot, I guess.

PENNY:    Yeah.

ROB:        Now China holds a lot of U.S. debt, right?

PENNY:    Yes, it does.

ROB:        Why did they buy so much debt?

PENNY:    Because they have a fixed exchanged rate system and they have had a trade surplus for many years, and they have, therefore, collected foreign reserves.  And when governments have foreign reserves they want to invest it some place safe, but that actually makes some positive return.  U.S. debt seemed like a good place for a long time.  But of course, it's just piled up over time and China holds actually more than they probably prefer to hold at the moment.  It's just a process of trying to invest those resources.

ROB:    Do you know what percentage, approximately, that China holds of U.S. Treasury debt?

PENNY:    I think it's about half of what foreigners hold.

ROB:        And do you know what foreigners hold?

PENNY:    I kind of forget what the number is now.  I mean many, many governments hold our debt.  Also many U.S. citizens and institutions hold our debt as well.  It's a big piece given it's just one country.  But you know, there's lots of people who are invested in our debt.

ROB:    With China, it's sort of the old adage that if you owe the bank a million its your problem; if you owe the bank a hundred million it's their problem.

PENNY:    Well, in a way.  I mean China certainly wants the U.S. to have good policies so the dollar doesn't decline too far, and their investment is not into much jeopardy.

ROB:        Do you think it's wise to invest in the Chinese stock market?

PENNY:    Well, I personally would not, since it's not very transparent.  It's not transparent at all, and because you can't earn dividends.  It's very hard to know really anything about the company you're investing in.   But if one wants to make bets on price changes, then it's a great place to invest.

ROB:        But the government in China sort of controls the price changes, don't they?

PENNY:    Well, I wouldn't characterize it that way.  The government does control who gets to list in the markets.  There are increasingly more companies --- more private companies as well as state companies.  But once they're on the market, it really is much more of a true demand and supply determining those prices.

ROB:    What do you see the future of China's balance of payments and the U.S. balances of payments going?  Do you think it'll get better, or get worse, or stay the same?

PENNY:    I think that in the median term it'll get better.  In short term, maybe not.  But in the median term it will.  You know China's leaders and policy makers are not happy with the very large trade surplus that they have, the same way we're not happy with a very large trade deficit.  And for future growth, they understand that developing their own consumer market would be very beneficial.  I believe they are moving in that direction.  It won't necessarily be easy to accomplish; there's lots of road blocks along the way.  But I think that will happen . And I think the U.S. households are adjusting their consumption expectations as well.  We will consume less and that will help our trade deficit, although the government has kind of replaced households in terms of heavy borrowing which won't help for a while.  But I think it'll rebalance.  It's partly a historical moment when it got so out of balance, and it partly had to do with the financial excesses that were happening in the U.S. as well.

ROB:    For a long time, you've been very, very interested in China, and you've been to China many times as I understand it.  Just visiting there, how has it changed in the most important ways over the last 15 years, or whatever period you've been going there?

PENNY:    Well I first went in 1976, and actually Mao was still alive, and so the reforms hadn't even started.  And I've gone back very often since then.  And, of course, the whole economic transformation is very impressive and a major, major change.  But I think the most striking thing to me, or impact of that, is how individual families and peoples' lives have changed.  It's just a much, much better place to live as a Chinese citizen than it used to be.  People have many more freedoms.  We look at China and say oh it's not free, but individuals and families have much more freedom to make decisions about where they work, and whether they start a business, and where to go to school, and whether to study abroad or travel, and to work hard and save their money for what they want to do, to buy property, and all of those things, none of which they could do before.

ROB:    What about their pollution situation?  Have they started to get serious about reducing that?

PENNY:    Clearly it's a concern of both citizens and of government and non-profit organizations, so it's gotten a lot more attention.  It's a very difficult problem to solve in any country.  We struggle with it here in the U.S. as well, so it won't be an easy solution.  And probably because China's growing so fast, it's easier to create new pollution at the same time you're trying to reduce it in other places.  But it's definitely an issue on the table, and working at it in lots of different levels.

ROB:    When we had our meeting, and I want to thank Phil Jones and Scott Roberts for joining us, it did strike me that they are both entrepreneurs that have had products made in China, and have products made in China.  It struck me that there was complete agreement between what they said about their activities at the entrepreneurial level and what they saw and thought, and what you were telling me from an economics perspective.  

PENNY:    Yeah.  It's a dynamic place.

ROB:        No doubt.  Penny, is there anything else you'd like to add?

PENNY:    Only that I would be generally optimistic for the long run.  People in China are very resourceful, and even though there are many challenges in the meantime, I think it's a place that's going to do well.

ROB:        Thanks a lot for being on today.

PENNY:    Well thanks for having me.